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Trusts

  • Revocable Trust
  • Irrevocable Trust
  • Florida’s New Trust Code

A trust established during the lifetime of the person creating the trust is a living trust. In contrast, a trust created at death in a last will and testament is a testamentary trust.
A settlor or grantor is a person creating the trust. When a living trust is established, a trustee must be appointed to manage and later distribute the trust assets to the beneficiaries. The beneficiaries are the persons who ultimately receive the assets from the trust. This event normally occurs upon the death of the settlor or grantor. The living trust instructs the trustee how to manage the assets and when to distribute the assets to the beneficiaries named in the trust. The person creating the trust can also be a beneficiary of the trust during his or her lifetime.

The person creating the trust (the settlor or grantor) may serve as the trustee of the trust. In such event, a successor trustee is named in the trust to manage and distribute the trust assets if the settlor or grantor is subsequently incapable of serving as trustee as a result of his or her disability or death.

Only assets conveyed to the trust can be administered by the trustee who owns the legal title to the trust assets for the benefit of the beneficiaries. The person creating the trust must convey real property to the trust by a properly executed deed. Likewise, personal property must be transferred to the trustee by a properly executed bill of sale. Bank accounts, stock certificates, certificates of deposits, and other intangible assets must be retitled in the name of the trustee.

Assets not conveyed or transferred to the trustee are subject to probate. A pour-over will is used to distribute to the trustee assets not owned by the trustee when the settlor or grantor dies. These assets are then administered and distributed to the beneficiaries named in the trust.

Revocable Trust

A trust established during the lifetime of the grantor or settlor is either revocable or irrevocable. A revocable trust permits the grantor or settlor to revoke the trust, alter the terms of the trust, or withdraw some or all of the assets from the trust. A revocable trust becomes irrevocable upon the death of the grantor or settlor.

Since the grantor or settlor of a living trust retains control of assets through his or her power to revoke or alter the trust, there are no gift, income, and estate tax consequences when assets are conveyed to a revocable trust. The grantor or settlor continues to report the earnings of the trust assets on his or her personal income tax return if the grantor or settlor is the trustee.

The constitution of the state of Florida and the Florida statutes grant a homestead exemption to every person who has legal or equitable title to real estate and maintains a permanent residence on that property for himself or herself and family. If this residence is placed in a revocable trust, the owner may still claim the homestead tax exemption as long as he or she is the sole beneficiary of the trust during his or her lifetime. The owner must also be permanently residing on the real property owned by the trust. In the trust, the grantor must be granted the sole right to the full use, occupancy, and possession of this homestead. Also, the revocable trust must not grant the trustee any power, authority, or duty with respect to the homestead until the person creating the trust directs otherwise or revokes the trust agreement, or the beneficiary dies.

The living trust is an excellent instrument by which a person can plan for the administration of assets in the event of a disability. A successor trustee can be named to administer the trust assets in such an event. The trust instrument normally states that when the written opinions of licensed physicians (the grantors and another physician) certify that the grantor is physically or mentally incapable of managing his or her property, the grantor’s right to continue to serve as the trustee during that period of incapacity is suspended. The trust document normally reserves the right of the person creating the trust to request the court to determine the question of incapacity or capacity to manage the trust assets. The successor trustee will manage the trust assets during the period of the trustee’s incapacity.

The need for a living trust is based on many factors, including the amount of the assets, the ability of the spouse to continue to manage assets acquired during the marriage, and the health of the husband and wife. Though it is best to consider a living trust as soon as the circumstances justify, the need for a living trust should especially be evaluated upon the death of the spouse. Special consideration should be given to the availability of a child to serve as successor trustee. If the child is not available to serve as the successor trustee, serious consideration should be given to the appointment of a bank or trust company as the successor or perhaps the initial trustee.

The assets placed in a living trust are not subject to a probate proceeding. However, these assets must be administered after the death of the settlor or grantor. The successor trustee must collect the trust assets, pay the final bills, be responsible for the federal estate tax apportioned to the trust, and make distribution of the remaining assets according to the trusts instructions. Creditors in a probate proceeding must file claims against probate assets within three months of the first publication of a notice to creditors in the newspaper. Since there is no similar publication procedure to shorten the claim period for a trust, a successor trustee cannot distribute the trust assets to beneficiaries free of potential creditor claims for two years from the date of the grantors death. This is because the statute of limitations period within which creditor claims must be asserted extends for two years from the date of the settlor’s death. A summary probate administration can be useful, since this procedure permits publication of a notice requiring that creditors file claims within three months of the date of first publication.

Irrevocable Trust

Another kind of trust is an irrevocable trust, one that cannot be amended or altered. The assets conveyed to an irrevocable trust cannot be withdrawn or returned to the grantor or settlor. An irrevocable trust is normally created for estate tax purposes. A person will transfer assets to an irrevocable trust to avoid having to include the fair market value of these assets in his or her taxable estate at death. It is important to remember that a transfer of an asset to an irrevocable trust constitutes a gift. Accordingly, the fair market value of the asset on the date of the transfer to the trust must be reported to the Internal Revenue Service as a gift by April 15 after the year of the transfer. The taxpayer’s estate or gift tax unified credit will be applied to the gift taxes due as a result of this transfer. The advantage of transferring assets to an irrevocable trust is that the appreciation in the value of these assets will not be subject to federal estate taxes upon the taxpayer’s death.

Another use of the irrevocable trust is for the purchase of life insurance to provide the beneficiaries of the trust with the money to pay the estate taxes of the grantor. Since the life insurance policy is owned by the trustee and not the taxpayer, the proceeds paid on the taxpayer’s death are not included in his or her gross estate. The payment of the premium for the life insurance during the taxpayer’s life is normally made from annual contributions by the taxpayer to the trustee of the irrevocable trust. Since there is presently a $12,000 per donee annual exclusion for federal gift tax purposes, there is no gift tax owed when these annual contributions to the irrevocable trust are made if the beneficiaries of the trust are granted the unrestricted right to withdraw these contributions during the year in which they are paid to the trustee. The withdrawal right for each beneficiary is usually limited to the amount of annual gift tax exclusion, which is presently $12,000 per donee.

The proceeds of an existing life insurance policy transferred to an irrevocable trust will be included in the estate of the grantor if he or she fails to survive for three years after the date of the transfer. Also, there is a gift tax on the value of the life insurance policy on the date of the transfer to the irrevocable trust.

If avoiding probate on the distribution of an asset after death is a goal, there are methods other than a trust. Bank accounts can be distributed to others without a living trust or a probate proceeding through the creation of joint bank accounts with the right of survivorship. However, there is the possibility of a withdrawal of funds by a joint owner without the knowledge and consent of the owner of the account.

Florida’s New Trust Code

Florida’s new trust code became effective on July 1, 2007. With a few exceptions, the new statutes apply to all trusts whether created before or after July 1, 2007.

This new trust code was necessary because Florida’s trust law presently covers only a portion of the law of trusts. Many provisions for a valid trust and the rights of creditors were found in other statutes or not at all.

This new Trust code permits the person establishing a trust to
appoint or designate a person to represent and bind a trust beneficiary or to receive notices, information, reports and accounts on the beneficiary’s behalf. This is important if the person establishing the trust believes that the beneficiary may not be reasonably available or responsible to sign receipts and to communicate with the trustee. Thus, an attorney or a family member could accept notices and information and bind the beneficiary who may not communicate. This will save considerable expense related to unnecessary court hearing to approve accountings or to obtain necessary approvals needed by the trustee.

The person receiving a notice as a designated representative is not a fiduciary. He or she is not liable for acts or omissions made in good faith. The trustee cannot serve as designated representative. Another beneficiary may only serve as a representative if the beneficiary to be designated is a spouse, grandparent, or descendant of a grandparent of either the beneficiary being represented or that beneficiary’s spouse. An amendment to an existing trust can be drafted by the attorney and signed by the person who has already created a trust to designate the appointment of a designated representative.

The new Florida Trust Code confirms that a trust is valid in Florida if it complies with either the law of the place were executed or the law where the person establishing the trust is domiciled at the time of creation. However, a trust for owning real property in Florida must comply with our Florida statutes requiring that a trust for land must be in writing and signed before witnesses by the party authorized to create the trust for the land.

The new trust code confirms that the testamentary aspects of a revocable trust signed by a person who is domiciled in Florida at the time of execution are invalid unless the trust instrument is signed with the formalities required for the execution of a will in this state. The new trust code confirms that the capacity to create a trust is the same needed for the execution of a will. This new law confirms that a trust a portion thereof may be void if the creation of the trust is procured by fraud, duress, mistake, or undue influence.

The new trust code clarifies that a trust must name a definite beneficiary or a charity and confirms that a trust can be established for the care of an animal alive during the settlor’s lifetime. The new laws permit a trust for a trust to be established for a non-charitable purpose for no longer than 21 years if the trustee is directed to apply the income annually to such worthy purposes as the trustee selects.

A new provision in the Florida trust code permits the non-judicial modification of a trust after the settlor’s death. Thus, the trust can be modified by the unanimous agreement of the trustee and the living persons who are current, intermediate, and first remainder beneficiaries. However, the new law states that there cannot be a non-judicial modification if a provision in the trust that prohibits its amendment or revocation. It is accordingly important that a person consider amending his or her trust if no non-judicial amendment is to be permitted after death.

The new law again provides that a trust consisting of property under $50,000 may be terminated if the trustee concludes the value of the trust property is insufficient to justify the cost of administration. However, the person creating the trust can expressly provides the trust may be terminated even in this event.

This new trust codes states that if a revocable trust is created
or funded by more than one person each person creating the trust may revoke or amend the trust with regard to the portion of the trust property attributable to that person’s contribution. If there is a revocation or amendment of the trust by fewer than all the persons creating the trust, the trustee shall promptly notify the other persons creating the trust of the revocation or amendment.

A new provision in the trust code states that action contesting validity of revocable trust that was revocable at the time the person creating the trust died is barred, if not commenced within the earlier of the time as provided in the Florida statute of limitations or six months after the trustee has sent a person a copy of the trust instrument and a notice informing the person of the trust’s existence,
the trustee’s name and address, and of the time allowed for commencing a proceeding.

A person who has created a revocable trust should consider setting an appointment with his or her attorney to review these and other changes in Florida’s new trust code. A decision can then be made regarding the need to amend the existing trust to take advantage of these new laws.

This page is excerpted from the Florida Senior Legal Guide.